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As an employer it is extremely important to pay your staff accurately and on time. In order to ensure this is done correctly employers should set up a payroll system so that the deductions can be made for tax and NIC contributions and to deal with changes to an employee's taxable benefits.
Many businesses, particularly small businesses, find it easier to outsource this function as calculating tax and NIC can be time consuming. Added complications can arise when you need to consider other areas such as maternity pay and pensions. Payroll functions can be outsourced through an accountant or managed payroll company.
Outsourcing payroll mean an added cost but it will allow you to concentrate on other areas of the business and reduce employee overheads.
When setting up a payroll there are various areas that need to be considered. In Part 2 of Brush Up Your Business Know How – Employing Staff – we outlined obligations such as Statutory Sick Pay and Maternity and Paternity Pay. In this issue we are concentrating on PAYE.
What is PAYE?
Pay As You Earn (PAYE) is the Inland Revenue's method for collecting income tax from the pay of employees. As an employer you are required to deduct income tax and National Insurance contributions (NICs) from your employees' pay and submit this to the Inland Revenue.
Each month, by the 19th or 22nd if you make electronic payments, you will need to send the latest amounts you have deducted from your employees' pay to the Inland Revenue. If however this is under £1,500 a month you may be able
The Inland Revenue has an online service which allows you to manage your PAYE via PAYE Online for Employers. Once registered with the site you are provided with access to information, third party software and forms such as P11D which are designed to help you manage your PAYE. Information on the Inland Revenue's online PAYE service can be found at www.inlandrevenue.gov.uk/efiling/help/mainhelp.htm
When does PAYE apply?
PAYE is applied to all payments an employee receives. This includes:
- Salary
- Overtime, shift pay and tips
- Bonuses and commissions
- Statutory Sick Pay
- Statutory Maternity/Paternity/Adoption Pay
- Lump sum and compensation payments such as redundancy pay
If an employee receives payments other than cash (e.g shares or vouchers), PAYE applies on the cash value of that payment.
Employee Tax Codes
Each employee is issued with a personal tax code by the Inland Revenue. You can calculate an employee's tax deductions by using this code together with the Inland Revenue taxable pay tables.
A new employees tax code can be found on their P45, however if they do not have this form they will need to complete a P46, details of which can be found on the Inland Revenue website.
PAYE forms
There are a number of standard forms and procedures which employers need in order to operate an effective system. These forms should be used to keep a record of all that has been paid to an employee including waters, payments and benefits.
There are three main forms which you need to give your employees to show how much income tax and NIC they have paid. These are:
- Wages Slips – created internally to show how their pay has been calculated.
- P45 – new employees who have had a previous job should give this to you when they start work. When they leave you then give them a completed P45.
- P60 – this shows the year's tax deductions and is given to employees at the end of the tax year.
PAYE can be a complicated matter. The Inland Revenue New Employers Helpline on Tel; 0845 60 70 143 will advise on what you need to do first while your local Business Link Support Team will be able to give you confidential advice.
This issue has briefly and simply looked at the complex issue of tax and payroll. The above information is correct at the time of writing but please check the details are up to date with the various organisations listed who should also be contacted for more detailed information on the topics discussed in this section.
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